Trust Law Essays

No historian has yet shown that in fact the trust was almost as strong as the corporation as a matter of judicial doctrine. The most famous example is the set of death taxes and military obligations that modern historians call the “feudal inci­dents.” The feudal incidents essentially taxed the land a man owned when he died, and they provided the primary source of revenue for the English crown during the later stages of feudalism. The evidence for this is somewhat hard to see at first, but it grows increasingly clear over time, becoming unambiguous by the early nineteenth century. Additional evidence comes from Professors Freeman, Pearson, and Taylor’s recent survey of eighteenth- and early-nineteenth-century joint-stock companies. Lescure 1847) (“Where, as is frequently the case, a precise time is fixed for the duration of the partnership, it is dissolved by the expiration or effluxion of that time, if it do[es] not meet with an earlier legal termination.”); Joseph Story, Commentaries on the Law of Partnership 403 (Bos., Charles C. This doctrinal shift probably first appeared around the 1820s, since this was the time when courts in England and the United States first began treating contractual arrangements as partnerships even when the partners did not want to do so.

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Because it was so effective as a substitute for the corporate form, the trust was widely used in England and the United States to hold the property of unincorporated partnerships and associations both long before and long after the corporate form became freely available through statutes of general incorporation in the mid-nineteenth century. Queen Elizabeth, King James I, and King Charles I all granted corporate charters to a variety of overseas trading businesses and domestic businesses that aimed to earn a profit. While limited liability protects the owners of a business from liabilities that might flow up from the business, entity shielding works in the opposite direction, protecting the business from the liabilities of the creditors and owners that might flow down. 162 (prohibiting transfer of an interest in trust)). This string of statutes thus had the effect of weakening the system of entity shielding that previously protected trust property in the law of trusts.

Indeed, at the time general incorporation statutes first appeared, many large businesses actually preferred the trust. Harris, Industrializing English Law, supra note 16, at 41; see also 2 William Robert Scott, The Constitution and Finance of English, Scottish, and Irish Joint-Stock Companies to 1720, at 3 (1910) [hereinafter Scott, Constitution and Finance] (cata­loging trading expeditions to Africa). Brown, Common Law Trusts as Business Enterprises, 3 Ind. That is, the creditors of a modern corporation enjoy both (a) priority of payment over the owners and their creditors and (b) the right to prevent the owners and their creditors from forcing the business to sell off its assets to pay their debts. 244, 245 (prohibiting transfer of an interest in trust); Ogle v. But some commentators have argued that equitable interests were assignable, including St. See, e.g., Francis Bacon, The Reading upon the Statute of Uses of Francis Bacon 16 (London, William Henry Rowe ed., W. German, Doctor and Student 185 (London, Henry Lintot 15th ed. The main evidence of the trust’s effectiveness in avoiding bene­ficiaries’ creditors appears in the long string of statutes that Parliament passed in the late Middle Ages to try to limit the trust’s effectiveness and prevent it from destroying the credit system. 172, 174 (holding that even a run-of-the-mill interest in an inheritance trust was reachable by creditors); Maitland, supra note 22, at 377–78 (describing the characteristics of “ownership in equity”); Turner, supra note 38, at 161 (explaining that a judgment creditor has an equitable interest in the debtor’s estate under the Statute of Frauds but not a legal interest). But even the resulting weakened system turned out to be extremely strong—and was actually almost exactly analogous to the entity-shielding regime that now exists in the modern corporation.

By rediscovering the trust’s effectiveness as a substitute for the corporate form, this Essay makes common cause with a larger movement in legal history that is revising the role of the corporate form and emphasizing the value of its alternatives. Ribstein, The Rise of the Uncorporation 4 (2010); Ryan Bubb, Choosing the Partnership: English Business Organization Law During the Industrial Revolution, 38 Seattle U. This Essay goes beyond the work in this new movement, however, by demonstrating for the first time the technical effectiveness of the common law trust. For examples of this kind of arrangement, see Jones v. Once the property belonged to a trustee, rather than to a debtor, entity shielding prevented the debtor’s creditors from seizing the assets through the ordinary judicial process. Consider the water supply company from the important 1701 case discussed above. Contractual waivers of trustee liability were so common in business trusts in the early-twentieth-century United States that a whole genre of cases grew up around them.

Harris, Industrializing English Law, supra note 16, at 167 (“[T]he unincorporated company . even this recent scholarship does not call into question the basic premise that the trust was legally inferior. 337, 339 (2015); Guinnane et al., supra note 23, at 691–96; Henry Hansmann et al., Law and the Rise of the Firm, 119 Harv. eds., 2005) (arguing business firms were able to achieve entity-like status in many ways before the companies acts of the mid-nineteenth century). The orderly liquidation process that creditors found so valuable in these compositions was possible only because the trust shielded a debtor’s property from any of the debtor’s creditors who did not become beneficiaries of the trust. There is, however, circumstantial evidence to suggest that entrepreneurs expected to lock in their capital and prevent withdrawals. Mc Coy, supra note 148, at 193–99 (describing a clause in the Agreement waiving all liability of the trustees for management of the trust).

The trust was never a completely perfect substitute for the corporate form, and it was occasionally burdened by legislative acts that made the trust illegal or otherwise less appealing than the corporate form. They first appeared in the organization of for-profit business enterprises in the mid-1500s, a few centuries after they began to be used in the organization of charities. Entity shielding does this by preventing the owners from individually demanding that the business liquidate and sell off its assets.

Nevertheless, as a matter of judicial doctrine, the trust was remarkably effective in offering the key features of the corporate form. At first, the right to form a corporation belonged mostly to the English crown. Thus, if I own shares in a grocery store that is organized as a modern corporation, entity shielding will stop my credit-card lenders from carting away the bread, meat, and freezer cases that belong to the grocery store if I am unable to repay my credit-card debt. Entity shielding is thus the reverse of limited liability. If a beneficiary had a life interest in property, for example, then the creditor could seize only the life interest and could not immediately seize or occupy the property as a legal owner in fee simple. I argue that the corporate form was not, as we have often been told, the exclusive historical source of the legal powers that enabled modern business. The trust also has a history in other common law jurisdictions outside the United States, such as Australia, Canada, and Scotland. Duxbury, Business Trusts and Blue Sky Laws, 8 Minn. See Henry Hansmann & Reinier Kraakman, The Essential Role of Organizational Law, 110 Yale L. 387, 393–98 (2000) (identifying the phenomenon that later would become known as “entity shielding”). I show that from the late Middle Ages to at least the middle of the twentieth century, the basic powers of the corporate form were also available through an underappreciated but enormously important legal device known as the common law trust. I focus exclusively on England and the United States simply for the sake of brevity. The term “entity shielding” first appeared in a subsequent article. See, e.g., Bubb, supra note 25, at 348–50 (arguing that various historical circumstances encouraged businesspeople to tolerate the trust’s purported weaknesses). The people for whose benefit the trustee held the property, such as the landowner’s wife or children, were analogous to “beneficiaries.” At first these arrangements were mere gentlemen’s agreements and were unen­forceable in the courts. The fraudulent-transfer statutes discussed above would allow a creditor who did not participate in the composition to void the debtor’s transfers to the trust. The existence of this company and many others like it around the time See Scott, Constitution and Finance, supra note 68, §§ 1D, 1E, 5A, 5C, 5E (listing trust-based joint-stock companies from the late seventeenth and early eighteenth centuries); see also Freeman et al., supra note 24, at 23–28 (describing the growth of joint-stock companies in the eighteenth century). This was an important move, because partnership law held each of a business’s partners personally liable for the business’s debts. Lamoreaux, Constructing Firms: Partnerships and Alternative Contractual Arrangements in Early Nineteenth-Century American Business, 24 Bus. To date, even those who question the importance of the corporate form have tended either to ignore the trust or to argue merely that for various reasons business people were willing to tolerate the trust’s many weaknesses. Instead, these creditors had to go through the process administered by the trustee. These investments would presumably have taken years to produce a return, suggesting the company’s entrepreneurs expected to stay in business for a while. The basic logic was that partnership law treated all contractual arrangements that resembled partnerships as though they were partnerships, and a business trust was a contractual arrangement that resembled a partnership. The courts concluded that a trustee could usually limit his personal liability by simply writing the words “as trustee, and not individually” next to his signature on a contract. These powers were also available throughout modern history through a little-studied, but enormously important, device known as the common law trust. This rule was already implicit in the remedies against a trustee’s transferees and pledgees that the Chancery began enforcing in the mid-1400s. The people who bought the shares were technically beneficiaries of the trust, but as a practical matter, they resembled stockholders of a modern corporation, with the trustees holding the property of the firm much as a corporation might hold the property of a firm. The trust’s achievements in legal doctrine are nevertheless important because they challenge the notion that the corporation was the exclusive source of key doctrinal technologies. In the early nineteenth century, courts began treating joint-stock-company trusts as though they were partnerships for purposes of limited liability. The trust was widely and very effectively used to hold the property of unincorporated partnerships and associations in England and the United States both long before and long after the passage of general incorporation statutes in the mid-nineteenth century. See supra notes 40–41 and accompanying text (discussing the use of specific performance and property recovery as remedies). The reports of the judges’ opinions do not say exactly how many members of the public ultimately purchased these 900 shares, but the reports do say that the shareholders were numerous—so numerous, in fact, that bringing all of those shareholders before the court would have been “impossible” Houghton was the moving force behind the enterprise, and he planned to use the proceeds of the stock offering to reimburse himself for the cost of purchasing the lease and then to make the improvements that the lease required. When the city’s contractor finally finished work on the pipe, the pipe turned out to be defective, carrying only six tons of water per hour, instead of the nineteen tons the city had originally promised. Powell, The Passing of the Corporation in Business, 2 Minn. The enormous power of the trust in judicial doctrine suggests that although the corporation may have had certain advantages, these advantages did not lie in the technical doctrinal features that scholars of corporation law have tended to focus upon. When the United Kingdom passed its first general incorporation statute in 1844, for example, trusts outnumbered corporations in the United Kingdom by a ratio of more than ten to one. The sale of these monopoly rights naturally upset the would-be competitors of the chartered businesses, and after Parliament expelled James II in the Glorious Revolution of 1688, Parliament itself became the primary source of incorporation for English businesses. Originally chartered as an overseas trading company, the South Sea Company moved into a complicated financial business of creating a market for government-issued debt. The concept known as “capital lock-in” is an application of this principle of entity shielding. Lady Shrewsbury (1632) 118 Selden Society 636 (Ex Ct) 636 (2001) (same); Scott, Law of Trusts, supra note 41, § 132 n.5 (citing Earl of Worcester v. In a series of statutes passed in 1377, Parliament created what we now know as the law of fraudulent transfers by prohibiting a person from giving his property to a friend or trustee in order to avoid his creditors. .” These statutes were only a partial solution, however. The statute’s effect was classically summarized in Forth v. Although a trust had never been a legal entity, the doctrines of Chancery, as modified by the various statutes, ensured that the assets that legally belonged to a trustee were shielded from a beneficiary’s creditors almost as though they belonged to a distinct entity. The rest of these companies all preferred to remain as trusts. Until 1844, Parliament had a rather cumbersome method for incorporating a business: It passed a special act of incorporation for each company it formed. Parliament and the South Sea Company perceived in the new unincorporated companies a source of competition for capital as well as a threat to the investing public, and so they worked together to pass the so-called Bubble Act of 1720. 139, 176 (1924) (noting the “business trust had [not] confined its operations to the oil business” but instead had “invaded the field of most of our business”). Aaron, The Massachusetts Trust as Distinguished from Partnership, 12 Ill. Capital lock-in allows a business to restrict its owners, as well as the owners’ creditors, from taking away the business’s property. A substantial amount of case law suggests equitable interests were not assignable. The 1571 statute, for example, prohibited a transfer for the purpose of avoiding creditors notwithstanding “[a]ny Pretence, Color, fayned consideration expressing of Use [i.e., trust] or any other Matter or Thyng to the contrary . They allowed a creditor to seize an interest only in a fraudulent trust, not in a legitimate trust. Much as the creditors of a modern corporate shareholder can seize a shareholder’s shares but not the property that legally belongs to the corporation, likewise a trust beneficiary’s creditors could seize the beneficiary’s equitable interest but not the property that legally belonged to the trustee. Unlike common law courts, the Chancery allowed an aggrieved beneficiary to obtain sworn responses from a trustee, to require the trustee to answer questions under oath, and to compel the trustee to produce the trust instrument and related documents. The courts of common law (as distinct from the courts of equity) recognized the trustee as the legal owner of the trust property and treated the trustee as though he were the one who incurred all of the legal obligations associated with the trust. Stevens, Limited Liability in Business Trusts, 7 Cornell L. A trust thus did not always show up in state records of business organizations. 344, 360 (1935) (holding that trusts formed for business purposes should be taxed the same as corporations); Hecht v. There is no question, then, that the trust was an enormously important form of organization throughout the Industrial Revolution and into the early decades of the twentieth century on both sides of the Atlantic. The answer is simple: Every aspect of the corporate form that legal theorists and historians have identified as key to the corporate form’s success also existed in the trust. Thus, a trustee was expected to contract in the trustee’s own name, rather than in the name of the trust or the beneficiaries. This became evident at the dawn of the joint-stock-company era, as demonstrated in The courts, however, disagreed. Second, the Chancellor offered new procedures for discovery. Under the common law, a trust has always been a personal obligation of the . See 1 Francis Williams Sanders, An Essay on Uses and Trusts, and on the Nature and Operation of Conveyances at Common Law, and of Those, Which Derive Their Effect from the Statute of Uses 15–16 (London, W. 1824) (indicating that conveyances in trust had been made in secret since late medieval times). 144, 156–57, 161 (1924) (holding that some, but not all, trusts were to be taxed like corporations); Hoadley v. Nevertheless, the anecdotal evidence of legal disputes and writing by legal practitioners shows that the trust remained a major force in American business up through at least the end of the 1920s. Rather, it was simply implicit in the way trust property was deeded and titled. B that the central logic of trust law was that legal title belonged to a trustee. For another classic articulation of the doctrine, see Hussey v. Basically, because the trustee was liable, the beneficiaries were not.


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